Learning from the Pig Market
The advent of ASF [African Swine Fever] is instructive of all markets and is material to our understanding of how markets work. The onset of the disease drove many Chinese farmers to liquidate their herds before their own pigs caught the disease and died. This created a surfeit of pork that only recently has been depleted along with government emergency supplies of pork in China.
Hedge fund managers were quick to seize on the implications of this global event and as the details and severity were revealed, many investors with little knowledge of the pork market began investing in the lean hog contract using deferred contracts selling at large premiums to the current cash. Simultaneously, U.S. pork producers ramped up the production facilities to deliver what is now at the end of 2019 the largest supply of pork ever. [2.8 million hogs last week or 10% more than last year]
Hedge funds have lost millions of dollars on this bet as they find themselves gambling on one of the most opaque markets in agriculture. Of the 2.8 million pigs slaughtered in a week, 50,000 head are traded in the cash markets. In a recent week, those 50,000 head traded for a base price of $42.48. The remaining pigs across the country were traded according to formulas returning an average of around $60 cwt. close to the futures price. Another half million pigs traded for $65 or $23 over the cash traded pigs.
Many of those speculative bets were placed in the December contract when it was selling at $70. As the speculators close those contracts at $60, many wonder if it makes sense to jump out into the April futures currently selling for $76 – a $16 premium to the current spot contract. Global demand for pork is up and exports are running well above last year but gambling on a market not well understood by the financial community makes managers uncomfortable.
Our own cattle markets are becoming opaque. Two of the largest states do not even report cash prices anymore [Texas and Colorado]. In the south nothing traded in reportable transactions after Thursday of this past week even though comparable sales in the north traded up to $122. Packers didn’t dare buy more cattle in the south because to do so would price 90% of their slaughter higher. Hedged formula sellers in the south got killed after pricing cattle at $119 and covering futures at $122.
With feedlot occupancy high and optimism in the air, have speculators overshot the spring markets for cattle currently trading $5-7 over the current cash? Are the cash markets becoming less meaningful? Are formulas the best way to market cattle? Negotiated grid sales present a viable option for all cattle trading with the base price negotiated and each lot competing with plant averages for premiums and discounts. Of course, USDA would need to publish the regional base prices negotiated – a big hurtle.
The advent of ASF [African Swine Fever] is instructive of all markets and is material to our understanding of how markets work. The onset of the disease drove many Chinese farmers to liquidate their herds before their own pigs caught the disease and died. This created a surfeit of pork that only recently has been depleted along with government emergency supplies of pork in China.
Hedge fund managers were quick to seize on the implications of this global event and as the details and severity were revealed, many investors with little knowledge of the pork market began investing in the lean hog contract using deferred contracts selling at large premiums to the current cash. Simultaneously, U.S. pork producers ramped up the production facilities to deliver what is now at the end of 2019 the largest supply of pork ever. [2.8 million hogs last week or 10% more than last year]
Hedge funds have lost millions of dollars on this bet as they find themselves gambling on one of the most opaque markets in agriculture. Of the 2.8 million pigs slaughtered in a week, 50,000 head are traded in the cash markets. In a recent week, those 50,000 head traded for a base price of $42.48. The remaining pigs across the country were traded according to formulas returning an average of around $60 cwt. close to the futures price. Another half million pigs traded for $65 or $23 over the cash traded pigs.
Many of those speculative bets were placed in the December contract when it was selling at $70. As the speculators close those contracts at $60, many wonder if it makes sense to jump out into the April futures currently selling for $76 – a $16 premium to the current spot contract. Global demand for pork is up and exports are running well above last year but gambling on a market not well understood by the financial community makes managers uncomfortable.
Our own cattle markets are becoming opaque. Two of the largest states do not even report cash prices anymore [Texas and Colorado]. In the south nothing traded in reportable transactions after Thursday of this past week even though comparable sales in the north traded up to $122. Packers didn’t dare buy more cattle in the south because to do so would price 90% of their slaughter higher. Hedged formula sellers in the south got killed after pricing cattle at $119 and covering futures at $122.
With feedlot occupancy high and optimism in the air, have speculators overshot the spring markets for cattle currently trading $5-7 over the current cash? Are the cash markets becoming less meaningful? Are formulas the best way to market cattle? Negotiated grid sales present a viable option for all cattle trading with the base price negotiated and each lot competing with plant averages for premiums and discounts. Of course, USDA would need to publish the regional base prices negotiated – a big hurtle.
